Property prices in Dubai’s residential real estate market are stabilising following extreme growth of around 60 per cent in the last two years, according to a new report from Standard & Poor’s Ratings Services (S&P).

However, in the case of another crash in the market, investors will be the worst affected, said Tommy Trask, director, Corporate Ratings at S&P.

“If we have a correction everyone will suffer to some degree, but I think the ones who will take the biggest hit are the buyers,” he said.

On the financing side, S&P’s report found that there was only modest growth in the exposure of banks to real estate, compared to the spike in real estate transaction volumes. “This suggests that the local banking system’s contribution to financing real estate transactions is currently low,” the report said.

UAE banks’ exposure to the property sector currently stands at around 25 per cent, which is similar to the rest of the GCC countries, said Timucin Engin, director, Ratings Analytical Financial Institutions at S&P.

Loans to the sector represented about 122 per cent of total equity at year-end 2013, still below the peak in 2008, when total exposure to the sector was almost 150 per cent of banks’ equity.

On the other hand, property developers are also more conservative than they were prior to the crisis. The majority of developers, especially government-related entities (GREs), have significant land-banks, and are using cash from pre-sold units to fund cover construction costs, explained Trask. Developers are also resorting to plot sales to boost cash-flow, and many are in a fairly strong position at the moment.

While there are “fewer empty units” this time around, international buyers account for the bulk of sales in Dubai’s off-plan property market, the report found.

“Standard & Poor’s views this significant presence of foreigner investors as potentially negative for the market’s overall stability. Indeed, during the last real estate cycle, we understand that a significant portion of foreign investors exited the market entirely, accentuating the nosedive in prices,” the report said.

“Generally speaking, nationals arguably have a greater long-term incentive to hold their investments, while foreigners might have a greater incentive to sell and leave the country. We think the tendency to sell is even greater for off-plan sales where locals as well as foreigners are likely to sell if prices trend downward. Additionally, given the country’s employment structure, the loss of jobs in a down cycle is significantly more pronounced among foreign workers and expatriates than among UAE nationals.”

Several factors could cause the real estate sector in Dubai to slide back into a correction, said S&P, including issues linked to large government-related developers, foreign investors, and US monetary policy.

However, new regulations enforced by authorities including tighter rules on new mortgage loans, capping loan-to-value (LTV) ratios, an increase in transaction fees and rules on escrow accounts have helped the emirate’s real estate market stabilise.